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Two-factor term structure model with uncertain volatility risk
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DOI：10.1007/s00500-017-2737-x.png)
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Abstract
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This paper aims to study two-factor uncertain term structure model where the volatility of the uncertain interest rate is driven by another uncertain differential equation. In order to solve this model, the nested uncertain differential equation method is employed. This paper is also devoted to the study of the numerical solutions for the proposed nested uncertain differential equation using the -path methods. We also use the built two-factor term structure model to value the bond price with the help of proposed numerical method. Finally, we give a numerical example where the price of a zero-coupon bond is calculated based on the -path methods.
Keywords:
Two-factor term structure
Uncertain short interest rate
Volatility risk
Bond pricing
Uncertain differential equation
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